Friday, March 4, 2011

intra-personal conflicts

I generally consider myself a fiscal conservative and a social liberal.  This approach is not unique to me, and my friends and family would likely show no surprise at my position.  And for the most part, these two macro components of my political world-view do not clash.

But in recent days I have been seeing an increase in the media coverage of a possible unwinding of Fannie Mae and Freddie Mac, along with speculation as to what this unwinding will mean for the mortgage market.

First, a brief bit of background.

Fannie and Freddie are "Government Sponsored Enterprises", sometimes called "agencies"; they were charted by the Congress but created as private companies charged with providing liquidity in the US residential mortgage markets.

Fannie and Freddie were never intended to be direct extensions of the Federal government, and the market (various markets, really) generally treated the two agencies as related to, but distinct from the government.  Things hummed along more or less well for years, and then during the Clinton administration, in the midst of a prolonged period of economic growth, the government made home ownership a priority and expressed a desire to expand mortgage liquidity to people at the lower ends of the socio-economic strata.

We all know now how this turned out, but this push (begun in the Clinton years, and taken up and amplified under Bush 2) towards home ownership for everyone had it's heart in the right place, I think.  If you see the "middle class" itself as having three tranches (upper, middle, and lower), it's fairly easy to argue that through the 80s and 90s access to the residential mortgage market helped lift the upper- and middle-middle class families onto a new plateau of relative wealth and economic comfort.  Having reached that plateau, these families were then able to fuel that next phase of prosperity in the mid-90s.  (this is just one component theory, sort of between a macro and micro approach to late 20th century economic development...reality is never fully explained by one theory).

Anyway, one of the bits of speculation in the news these days is that without Fannie and Freddie (and the shadow of the government behind them), the market for the 30 year fixed rate mortgage may dry up.  And this specter is what has my fiscal conservatism warring with my social liberalism.

On the one side, I can see how the two mortgage agencies leveraged their implied government support into super-normal profit margins for their space in the market, and how their presence in that market "crowded out" the potential for truly private industry to develop.  I also strongly suspect that Fannie and Freddie effected a parallel shift in the market clearing price for all mortgages.  Even minor shifts in this price would bring about massive shifts in wealth in the economy - we are talking about trillions of dollars.  So, to summarize this side, I think that the two agencies (and the government through them) distorted the true market for homes and rates, and that this distortion kept the market from "working" towards a healthier efficiency.

OK, but on the socially liberal side of my brain I can offer some severe criticisms of the markets and can easily see how a world without Fannie and Freddie would have resulted in an even more pronounced inequity in our society.  In particular, the availability of a 30 year, fixed rate loan has been one of the core drivers of the "American Dream" for 1000s of middle class families over the last 20+ years.

Consider a couple of numbers from today's mortgage market:

  • The average 30 year fixed mortgage rate today is ~ 4.88%; financing $200,000 at this rate for 30 years works out to a principal and interest monthly payment of ~ $1059

  • The average 15 year rate is 4.15%; financing that same $200,000 house purchase at this rate gives a payment of $1494
The difference in payment represents a 41% higher monthly cost for the shorter loan; this additional $400+ could easily be the difference between affordability for a middle class family.  Now, bear with me for a minute; I'm not suggesting that owning a home is a universal human right on par with freedom.  But what I am suggesting is that housing will always be a central concern to folks (along with food, and along with greater attained wealth, increasingly discretionary spending on things like entertainment, education, and healthcare), and so I think it not unreasonable that a person of modest means could be expected to budget around a fixed monthly payment that ensured them a place to live.

If unwinding Fannie and Freddie does in fact lead the market to leave behind the 30 year fixed rate loan, I expect the ramifications to include cutting off one proven way forward for middle-middle class people to attain a reasonable level of financial security.  This scenario will ultimately affect the rest of the economy in deep and wide ways that are tough to predict.

It's a problem with one simple solution, but it is my hope that the next 50 years will provide an opportunity for people of lower incomes to improve their lot, while at the same time allowing private industry to efficiently employ capital.

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